Jamie Jemmeson
June 29, 2022

ECB remain on track to hike rates in July

Energy price forecast reinforce recession forecasts

The Euro lost ground against the US Dollar in the early part of this week as European Central Bank President Christine Lagarde played down concerns about a recession in the Eurozone on Tuesday. In addition, Lagarde commented that policymakers are ready to raise rates at a faster pace if needed and if inflation continues to surge higher.

European Central bank officials gathered in Portugal for their annual conference, focussing on surging consumer prices and the timing of rate hikes. The EU expects a headline inflation rate of 6.8% this year, well above the ECB’s target of 2%. Inflation remains a concern for investors as they closely track what the ECB says and does. High levels of debt in Europe are also a worry, particularly in Italy. A return to tighter monetary policy could become a financial constraint for these economies.

Looking ahead to the remainder of this week, the highlight economic releases from the Eurozone will centre around the latest economic sentiment index on Wednesday, followed by the preliminary flash estimate for Eurozone June CPI on Friday. The annual CPI consensus forecast indicates a fresh new high of 8.5%, up from 8.1% in May, driven by higher food and energy process. Markets will review the latest Eurozone unemployment figures on Thursday.

Sterling continues to trade the ranges

Sterling remains range-bound as global risk sentiment continues to drive price action. Yesterday, equity markets slid following the release of the US consumer confidence figures that fell to a fresh 16-month low.

Political uncertainty persists in the UK. Scottish First Minister Sturgeon stated that the government will publish an independence referendum bill that will be consultative with a proposed vote in October next year. Sturgeon said the UK Supreme Court will be asked to rule on whether a referendum vote would be legal without approval from the UK government. There are significant hurdles to overcome before any referendum.

Overall confidence in the UK outlook remained weak, although forthcoming fiscal support measures could provide an element of relief.

Fed maintain a hawkish outlook amid mixed data

The US Dollar continued to trade at elevated levels against several major pairs following the latest release of the goods trade balance. The gap narrowed to $104.3 billion in May from an upwardly revised $106.7 billion in April. The reading is the lowest trade deficit this year, as exports increased by 1.2% to a record high while imports fell by 0.1%. The data added to expectations that US GDP growth with a rebound in Q2. However, growth forecasts remain moderate for the second half of 2022 and into 2023.

On Wednesday, the updated estimate for US GDP (Q1) expects to show that the US economy contracted, but not by as much as initial estimates. The latest set of figures may increase market expectations of a return to growth in Q2. The Fed preferred inflation gauge, the Personal Consumption expenditure (PCE) releases on Thursday. It is likely to draw investors’ attention. Elsewhere, the ISM Manufacturing Survey indicates another decline for the sector as the market looks for fresh clues regarding headwinds to economic growth and the Fed’s expected pace of monetary policy tightening. 

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